Does it ever make sense for retirees to go bankrupt? For many seniors, yes. Almost 30,000 seniors and baby boomers filed a bankruptcy or consumer proposal in Canada in 2018. The numbers for Ontario are just as staggering with almost 9,000 older Ontarians needing to declare insolvency in order to deal with the burden of overwhelming debt they cannot pay on a fixed, and often reduced, income. From our annual study of seniors and bankruptcy we know that just over 7% of insolvent debtors were retired. The amount of seniors (60+) that file a bankruptcy or consumer proposal with our firm is roughly 12% while another 18% are pre-retirees. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to file insolvency.
The problem with carrying debt into retirement is that it must be serviced with less income than when seniors were working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with seeking assistance from a Licensed Insolvency Trustee.
If you already have debt when you retire, and your income drops when you retire, it may become impossible to service your debt and pay your living expenses. It may not even be your fault. Many seniors financially help their adult children who are struggling to get on their own two feet. That can often deplete their retirement nest egg, and even lead to new debt.
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What can seniors do if they have debt problems?
Seniors facing financial problems have unique issues compared to younger Canadians:
- most are on a fixed or reduced income including social assistance, pension income and sometimes support payments;
- they need to protect assets like their home and RRSP’s since they will have little ability to replace these investments before or during retirement.
Here a summary of your debt relief solutions if you have debts, and all of your income is from pensions.
First, you can do nothing, and stop paying your debts.
If you have no assets, and if all of your income is from pensions, in most cases your creditors will be unable to garnishee your pensions. This is because pension income is not considered wages and as such cannot be garnisheed. Practically you could do nothing and the creditors would have no way to enforce any legal actions against you.
Of course doing nothing doesn’t eliminate your debt. Your creditors may still phone you and send you collection letters, and they may take you to court, so you haven’t solved the problem; you have simply ignored them. If you open a new bank account at a bank where you have no debts, and if you are not stressed out by the phone calls, and if you have no other assets, doing nothing may be the correct option for you.
Should you sell or refinance your home?
If you own a home you could sell your house and use the proceeds to pay off your debt. If the costs to carry your home including property taxes are beyond your means it may make financial sense to downsize to a smaller home or apartment. However most seniors do not want to sell their house to eliminate debts.
It may be possible to utilize the equity in your home to pay off existing debts. You may be able to refinance with a traditional second mortgage or reverse mortgage. With a debt consolidation loan you borrow at a bank at reasonable rates to pay off your high interest debts, like credit cards. The lower interest rate may allow you to devote more of your monthly payments to principal instead of interest, so you can repay your debts on your own. Refinancing through a second mortgage will work if your debts are less than the equity value of your home and you can afford the monthly payments.
Refinancing may not be suitable if you have significant debts. Mortgaging the equity in your home is a big risk if you do not eliminate all of your unsecured debts and you cannot keep up with all of your debt payments.
Your third option is to make a proposal to your creditors
If you can’t afford to repay your debts in full, another viable option is a consumer proposal. In a consumer proposal you repay a portion of your debts. The amount you repay is negotiated with your creditors by a consumer proposal administrator like Hoyes Michalos, and depends on your income, your family size, and your assets. For example, if you have $50,000 in unsecured debts, it may be possible to negotiate a settlement where you pay $500 per month for 50 months, or roughly half of the amount owing, or perhaps even less.
If you have some equity in your home but not enough to cover all your debts, you can use this equity to make a proposal to your creditors while keeping your home.
As a last resort, file bankruptcy
If even a consumer proposal is more than you can afford, the final option is personal bankruptcy. Bankruptcy discharges your unsecured debts, but there is a cost of bankruptcy which you will need to be able to afford on any reduced income.
For a retiree, the cost of bankruptcy may simply be too high, and the “do nothing” approach may be the best option. However, the stress of the situation may lead you to decide that a consumer proposal or bankruptcy is the correct option.
Protecting your RRSP
RRSP’s and RRIF’s are excluded from seizure in a bankruptcy or consumer proposal with the exception of contributions made within the last year. Since most seniors are no longer making RRSP contributions this limitation may not apply. Since your retirement funds are already protected by bankruptcy law, it is important that you talk to a bankruptcy trustee before draining your retirement savings to pay off debts. Again, if by doing so you are not dealing with all of your debt problems and you are jeopardizing your retirement, you trustee can talk to you about whether or not bankruptcy or a consumer proposal are a better choice.
As you can see, there are many factors to consider when deciding how to deal with your debts. The answer to the question: “Does it ever make sense for retirees to go bankrupt?” depends on your situation.
Here’s my advice: contact one of our local licensed debt experts near you so we can discuss your options. Our consultations are free, and there is no obligation. We can help you build a plan to deal with your debt, reduce the stress and anxiety and improve your retirement.